ASB Quarterly Economic Forecast August 2019

• The
economy looks like it will fail to rebound significantly
over the next year, with growth to lift only slightly.
• Ongoing domestic malaise remains
the gravitational drag, though global headwinds are
intensifying.• Monetary policy may
test its practical limits, which would bring quality
Government action to the fore.

The expected rocket back to
growth for the New Zealand economy has stalled somewhat,
despite a number of factors continuing to propel it forward,
according to the latest ASB Quarterly Economic Report.

Although near-record Terms of Trade (courtesy of high
export commodity prices), strong population growth, and
even-lower interest rates are keeping momentum up in the
economy, domestic headwinds and growing global ones appear
to be taking their toll.

“Global prospects are for
the slowest growth since the Global Financial Crisis, and
the risks have risen sharply recently,” says ASB chief
economist Nick Tuffley.

“Donald Trump has slammed
further tariffs on China, reducing the chances of a
ceasefire anytime soon. Meanwhile, newly-elected UK PM
Boris Johnson is ordering ‘Exit’ signs in bulk to
illuminate his negotiating stance with the EU. The last
thing the global economy needs is a bad hair day that a
comb-over won’t fix,” says Tuffley.

Closer to
home, businesses remain in a funk, with confidence still
falling. Tuffley says the combination of domestic and global
uncertainties mean businesses are wary of putting their
hands in their pockets.

“Capital spending is soggy
outside of anything involving construction, but trading
conditions are simply not as bad as surveys suggest.
Businesses need to focus on the key levers of their
performance that they can control. The challenge is that we
need more investment to improve our becalmed productivity,
and deliver the strong economic and wage growth that is key
to long-term prosperity,” says Tuffley.

According
to the report, it wasn’t all doom and gloom, with monetary
policy helping to shore up growth and early signs of
response in the housing market. With the Reserve Bank of New
Zealand openly talking about the potential for negative
interest rates, Tuffley says now is the time for the
Government to prepare quality spending and investment plans
as contingencies.

“The Government could line up
targeted welfare spending/tax cuts aimed at giving the
economy a cyclical boost. The country is also crying out
for infrastructure and policies that would jump-start
productivity. With Government debt low and its borrowing
costs even lower, the Government is well-placed to lend a
hand, if needed,” says Tuffley.

International Outlook – Trade War fears
crystallisingThe global
growth slowdown has become even more entrenched in recent
months. Trade war impacts are now more clearly showing up
in hard data, with forecasts for New Zealand’s trading
partners continuing to be revised down.

“According
to Consensus Economics forecasts, trading partner growth is
expected to print well below trend for the next two
years,” says Tuffley.

“Growth forecasts for the
Australian economy have also been pruned, although recent
signs of a bottoming in the Sydney and Melbourne property
markets may help support analyst forecasts for a recovery in
the Aussie economy next year.

“In contrast, the
slowdown in the Chinese economy looks set to resume and
Brexit continues to hang over the UK. Despite the global
gloom, the country’s exports sector is expected to hold
relatively well,” says Tuffley. The New Zealand economy under
pressureNew Zealand
economic growth has slowed since mid-2018 and is likely to
remain subdued for the remainder of 2019, according to the
ASB Quarterly Economic report, although lower interest rates
are expected to support a recovery in economic demand in
2020.“Business confidence has remained persistently
weak over the past 18 months, with key measures of business
activity pointing to economic conditions deteriorating in
recent months.“A key puzzle over the recent economic
cycle has been subdued price inflation relative to capacity
measures, in particular relatively subdued wage growth
despite the steady decline in the unemployment rate,” says
Tuffley.Recent ASB analysis suggests that, like
Australia, there may be greater slack in the NZ labour
market that previously believed. Furthermore, with labour
demand cooling as business confidence remains weak, the
degree of slack in the labour market may start to increase
going forward.

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